The effect of the mandatory adoption of IAS/IFRS on earnings management: Empirical evidence from South Africa

Abstract

This research investigates the effect of mandatory transition of South African companies to IFRS on earnings management, essential attribute of accounting quality. Specifically, the study examines whether the mandatory adoption of IFRS is associated with reduction of earnings management and therefore, an improvement of accounting quality. In addition, the paper focuses on the effect of corporate governance factors on earnings management. Earnings management is assessed by the magnitude of discretionary accruals and accruals quality. The paper compares earnings management in the pre-mandatory IFRS adoption period; 2002-2004 and the post IFRS adoption period; 2010-2012. This study focuses on a sample of 276 firm-year observations, 46 firms drawn from the 413 South African listed companies. A regression model was applied to examine the relation between mandatory adoption of IFRS, corporate governance mechanisms and discretionary accruals controlling for other some factors explaining earnings management. Our findings show that mandatory adoption of IFRS by South African companies is associated with lower earnings management. This result suggests that mandatory transition to IFRS contribute to an improvement in the quality of accounting information. Furthermore, results show that the percentage of independent outside directors, the separation of roles of CEO and Chairman of the board and company size have significant influence on reducing discretionary accruals.

International Financial Reporting Standards Adoption and Earnings Management: The Fundamental Effect Framework

“…This outcome of insignificant reduction in earnings management and insignificantly improved earnings quality under IFRS agrees with the findings inDang et al (2018);. It also aligns with the general result of lower earnings management as recorded inEneje et al (2016);Sellami and Slimi (2016);Hassan (2015);Mechelli and Cimini (2013). Equally, the lower earnings management seen in NII variable conflicts with the rise in earnings management observed in PAT.…”

“…Another challenge associated with previous empirical works is the conflicting outcomes over the effect of IFRS adoption on earnings management and quality. While Odoemelam et al (2019) -Nigeria, Hassan (2015) -Nigeria, Financial Risk and Management Reviews, 2020, 6(1): 52-78 Sellami and Slimi (2016) -South Africa and Mechelli and Cimini (2013)-EU documented less earnings management and enhanced earnings quality in the post IFRS adoption era; Mongrut and Winkelried (2019) -Latin America, Malofeeva (2018) -Russia, Uwuigbe et al (2017)-Nigeria, Uwuigbe, Emeni, Uwuigbe, and Ataiwrehe (2016) -Nigeria and Rudra and Bhattacharjee (2012)-India reported increased earnings management and less earnings quality in the period after the adoption. Even Said (2019)-Canada reported no effect.…”

“…Results showed among others that IFRS adoption increases earnings management. Sellami and Slimi (2016) investigated the effect of mandatory adoption of IFRS on earnings management in South African companies. A sample of 276 firm-year observations of 46 firms drawn from the 413 South African listed companies was used.…”

CEO characteristics and earnings management: empirical evidence from France

“…In the extant literature we also undertake to analyze the following variables: 3.2.1 Firm size and earnings management. The relationship between firm size and earnings management remains ambiguous (Sellami and Slimi, 2016). In addition, firm size it's essential to affects the quality of reported information.…”

An empirical investigation of determinants of sustainability report assurance in France

“…We measured the degree of internationalization (DI) by the proportion of foreign sales divided by the total sales (Robb and Zarzeski, 2001;Bansal, 2005;Branco and Rodrigues, 2008). The ratio of total debt to total assets was used to assess the leverage level (LEVERAGE) (Sierra et al, 2013;Zorio et al, 2013;Branco et al, 2014;Sellami and Slimi, 2016;Kuzey and Uyar, 2017). Company's age (AGE) is determined using the number of years since the foundation of the company (Godos-Díez et al, 2011;Sellami and Tahari, 2017).…”